How good are the top 10 stocks of NIFTY Quality Low-Volatility 30 Index?

When it comes to stock selection, two questions are always on the top of my head: (1) Is there a simple way to find out how good a business is? At least I must be able to identify stocks that I should not invest in. If I can do this in a visual manner from balance sheet data it would be awesome. (2) Is there a way I can identify a good business from price information alone?

The Earnings Power Box by Hewitt Heiserman Jr is the answer to the first question (in my opinion of course) and low volatility investing is the answer to the second. In this article, I present the Earnings Power Box graphs for the top 10 stocks of Nifty Quality Low Volatility 30 Index based on the free stock analysis spreadsheet to value stocks in multiple ways!

As readers may be aware, I am a fan of strategic indices, also known as smart beta indices, also known as factor-based indices. Factor investing is when one or more criterion like alpha, quality, low volatility, value are used to build a basket of stocks. This could simply be an individual stock portfolio or an index on which a mutual fund or ETF is based on.

Momentum investing where stocks with a recent price increase is also a type of factor investing: Momentum Stock Investing in India: Does it work? At least in the large cap segment, there is a strong correlation between momentum and low volatility investing.

What is NIFTY Quality Low-Volatility 30 Index?

This has 30 stocks from NIFTY 100 and NIFTY Midcap 50 indices. Stocks with low price volatility in the last 365 days and higher profitability (ROE), lower leverage (debt to equity) and stabler earnings (EPS growth) are part of the index.

These are the top stocks of this index as on May 31st, 2019

HDFC Bank Ltd. 5.82

Hindustan Unilever Ltd. 5.00

ITC Ltd. 4.91

Wipro Ltd. 4.66

Infosys Ltd. 4.61

Britannia Industries Ltd. 4.49

Asian Paints Ltd. 4.47

Tata Consultancy Services Ltd. 4.27

Marico Ltd. 4.00

Housing Development Finance Corporation 3.79

The stocks in red (50% of the top 10) are also part of the Nifty 100 Low Volatility 30 Index – 30 stocks from Nifty 100 with low price volatility in the last 365 days. I could have just gone with the low volatility index for this study but figured another factor like quality is a bit more aesthetically appealing!

What is Hewitt Heiserman Jr.’s Earnings Power Box?

This is a plot of two metrics: the Defensive EPS (earnings per share) vs Enterprising EPS. The idea is to spot where a company falls in.

So once we plot the graph it is a simple matter to check in which quadrant the data points lie and how it has changed with each financial year. In the graphs below, the year refers to March 31st of the corresponding financial year.

HDFC Bank

Hindustan Unilever

ITC

Wipro

Infosys

Britannia Industries

Asian Paints

Tata Consultancy Services

Marico

Housing Development Finance Corporation

Summary

HDFC Bank: For conservative investors, generates cash but not above weighted average cost of capital

Hindustan Unilever:Great business with authentic earnings power

ITC: Great business with authentic earnings power

Wipro: Same as HDFC bank

Infosys: Same as HUL, ITC (almost)

Britannia Industries: As Infy

Asian Paints: Same as HUL. ITC

Tata Consultancy Services: Same as HUL. ITC

Marico: Has moved to a better spot in recent years

Housing Development Finance Corporation: More aggressive than the rest but not a bad buy per se

I hope you would agree that factor investing and a simple price based investing is a wonderful way to spot good businesses without worrying balance sheet jargon. Naturally, it would not be fool-proof but is a simple way to buy stocks without breaking our heads.

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About the AuthorM. Pattabiraman(PhD) is the author and owner of freefincal.com. He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Follow @freefincal “Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis.
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